China Loses Its Allure

Jan 25th 2014

ACCORDING to the late Roberto Goizueta, a former boss of The Coca-Cola Company, April 15th 1981 was “one of the most important days…in the history of the world.” That date marked the opening of the first Coke bottling plant to be built in China since the Communist revolution.

The claim was over the top, but not absurd. Mao Zedong’s disastrous policies had left the economy in tatters. The height of popular aspiration was the “four things that go round”: bicycles, sewing machines, fans and watches. The welcome that Deng Xiaoping, China’s then leader, gave to foreign firms was part of a series of changes that turned China into one of the biggest and fastest-growing markets in the world

For the past three decades, multinationals have poured in. After the financial crisis, many companies looked to China for salvation. Now it looks as though the gold rush may be over.

More pain, less gain

In some ways, China’s market is still the world’s most enticing. Although it accounts for only around 8% of private consumption in the world, it contributed more than any other country to the growth of consumption in 2011-13. Firms like GM and Apple have made fat profits there.

But for many foreign companies, things are getting harder. That is partly because growth is flagging (see article), while costs are rising. Talented young workers are getting harder to find, and pay is soaring.

China’s government has always made life difficult for firms in some sectors—it has restricted market access for foreign banks and brokerage houses and blocked internet firms, including Facebook and Twitter—but the tough treatment seems to be spreading. Hardware firms such as Cisco, IBM and Qualcomm are facing a post-Snowden backlash; GlaxoSmithKline, a drugmaker, is ensnared in a corruption probe; Apple was forced into a humiliating apology last year for offering inadequate warranties; and Starbucks has been accused by state media of price-gouging. A sweeping consumer-protection law will come into force in March, possibly providing a fresh line of attack on multinationals. And the government’s crackdown on extravagant spending by officials is hitting the foreign firms that peddle luxuries (see article).

Competition is heating up. China was already the world’s fiercest battleground for global brands but local firms, long laggards in quality, are joining the fray. Many now have overseas experience, and some are developing inventive products. Xiaomi and Huawei have come up with world-class smartphones, and Sany’s excellent diggers are taking on costlier ones made by Hitachi and Caterpillar. Consumers will no longer pay a hefty premium just because a brand is foreign. Their internet savvy and lack of brand loyalty makes them the world’s most demanding customers (see article).

Some companies are leaving. Revlon said in December that it was pulling out altogether. L’Oréal, the world’s largest cosmetics firm, said soon afterwards that it would stop selling one of its main brands, Garnier. Best Buy, an American electronics retailer, and Media Markt, a German rival, have already left, as has Yahoo, an internet giant. Tesco, a British food retailer, last year gave up trying to go it alone, and entered a joint venture with a state-owned firm.

Some of those who are staying are struggling. IBM this week said that revenues in China fell by 23% during the last quarter of 2013. Rémy Cointreau, a French drinks group, reported that sales of its Rémy Martin cognac fell by more than 30% during the first three quarters of last year because of a plunge in China. Yum Brands, an American fast-food firm, said in September last year that same-store sales in China had fallen by 16% in the year to date. Its problems were partly the result of a government investigation into alleged illegal antibiotic use by its chicken suppliers.

Investors no longer celebrate firms with big investments in China. Our Sinodependency Index weights American multinationals by their China revenues. Sino-dependent firms used to outperform their peers, but in the past two years their share prices have done worse than others’.

As Jeffrey Immelt, the boss of GE, puts it, “China is big, but it is hard…[other] places are equally big, but they are not quite as hard.” Companies that want to stay in China will have to put in even more effort. Many will have to change strategy.

One China is over

First, rising costs mean that bosses must shift from going for growth to enhancing productivity. This sounds obvious, but in China the mentality has long been “just throw more men at the problem”. One way to get a grip on costs is to invest in labour-substituting technology, not only in manufacturing but also in services. Also, multinationals are falling behind local firms like Alibaba and Tencent in exploiting a surge of big data coming from e-commerce and smartphones.

Second, tighter control is another must. GSK’s bosses in London admitted that its problems in China were partly the result of executives acting “outside of our processes and control”. Managers in headquarters must ensure that executives’ behaviour and safety standards are as high as anywhere else in the world. Chinese consumers are even more active on social media than those in the West, so any scandal is instantly broadcast nationally.

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High Stakes Limit Bid to Cow Putin

By Matthew Karnitschnig in Berlin, Selina Williams in London and William Mauldin in Washington

Updated March 4, 2014 11:10 p.m. ET
Threats by the U.S. and European powers to impose tough sanctions on Russia over its incursion into Ukraine have run into a difficult economic reality: The West has as much at stake as Moscow.

While sanctions were central to international efforts to exert pressure on countries such as Iran and Myanmar in recent years, Russia’s sheer size and economic entanglement with the West make it much harder to isolate.

Russian President Vladimir Putin seized the point at a news conference on Tuesday in Moscow, warning that all sides would suffer if sanctions were imposed.

“Those who are thinking of imposing the sanctions should be the ones first of all to think about their consequences,” he said. “I think in the modern world, when everything is so interconnected and everyone depends on everyone else in one way or another, it’s of course possible to do some damage to one another, but it will be mutual damage.”

President Barack Obama and other Western leaders have warned Russia of severe consequences if it doesn’t reverse course in Ukraine.

Yet Russia has become so deeply embedded into the European economy since the Soviet Union’s collapse that any move to substantially curtail its commercial and economic ties with the West would risk major economic damage to both sides across a range of sectors—from energy to transportation and finance.

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China Demand Still Buoys Global Producers

By Patrick McGroarty in Johannesburg, Drew Hinshaw in Accra, Ghana, and Rhiannon Hoyle in Sydney

Feb. 3, 2014 7:10 p.m. ETnull

Leafy dried tobacco, stacked in a Zimbabwe auction hall, offers a glimpse of how China’s resilient global demand has spared many suppliers—even as investors flee emerging markets on fears of the Asian giant’s ebbing appetite.

Last year, Zimbabwe auctioned off one-third of its tobacco crop to its biggest customer, China, bringing in about $700 million overall to the cash-starved southern African economy. This month, the government is opening its annual tobacco auctions earlier than usual, anticipating that an even larger crop and sustained Chinese demand will earn it as much as $1 billion, said Zimbabwe’s Tobacco Industry & Marketing Board.

“When times are great people smoke more. When times are difficult people smoke more,” said Adam Molai, executive chairman of Savanna Tobacco, a Zimbabwean cigarette maker. “There are a lot of people in China to smoke more.”

From southern Africa to southern Asia, investors have soured on many commodity-rich emerging markets boosted in the past by China’s ravenous appetite for what is grown from the soil or extracted from the mines. But so far, a slowing China hasn’t hurt its suppliers much.

That is because massive Chinese demand hasn’t significantly weakened and many emerging economies now have their own consumers to help pick up any slack. The global market jitters, economists and executives say, reflect less an actual falloff in China’s appetite and more a bet that China’s growth will continue to taper off.

“People are mistaking slowing headline growth with the real impact of GDP. It’s not game over,” said Charles Robertson, chief economist for investment bank Renaissance Capital. “The Chinese growth story is still decent even if the percentage number is slower.”

As investors have fled emerging markets around the world recently—also spurted on by the U.S. Federal Reserve’s diminished bond-buying program—they have punished some vital Chinese suppliers, such as Indonesia and South Africa. Their currencies, the rupiah and the rand, have lost a quarter of their value against the U.S. dollar in the past year.

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Spotted Again in America: Textile Jobs

By Cameron McWhirter in Atlanta And Dinny McMahon in Hangzhou, China

Updated Dec. 22, 2013 3:31 p.m. ET

Zhu Shanqing, who owns a yarn-spinning factory in Hangzhou in China’s Zhejiang province, is struggling with rising costs for labor, energy and land. So he is boxing up some of his spindles and moving.

To South Carolina.


Mr. Zhu is one of a growing number of Asian textile manufacturers setting up production in the U.S. Southeast to save money as salaries, energy and other costs rise at home. His company, Keer Group Co., has agreed to invest $218 million to build a factory in unincorporated Lancaster County, not far from Charlotte, N.C. The new plant will pay half as much as Mr. Zhu does for electricity in China and get local government support, he says. Keer expects to create at least 500 jobs.

There is another benefit. As costs continue to increase in China, Keer can ship yarn to manufacturers in Central America, which, unlike companies in China, can send finished clothes duty-free to the U.S.

The move by Mr. Zhu and others will scarcely revive a once bustling Southern textile industry. But it illustrates how shifts in global trade are creating advantages for U.S.-based manufacturing.
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WTO Deal Shows Hurdles to Global Trade Pacts

By Ben Otto
Dec. 8, 2013 4:46 p.m. ET

NUSA DUA, Indonesia—Efforts to liberalize global trade inched forward over the weekend, but the limited progress showed the difficulties of broadly reducing trade barriers for all nations and the rising appeal of smaller regional pacts.

Negotiators at the World Trade Organization meeting in Bali, Indonesia, agreed to a scaled-back package aimed primarily at streamlining customs procedures world-wide, a modest breakthrough in the trade discussions that began in 2001 in Doha, Qatar. The agreement could add billions of dollars to the $65 trillion global economy by making it easier for goods to pass through customs.

The deal reached Saturday still needs formal ratification by all 159 WTO members and could take months, or even years, to come into effect.

After reaching a deal in Bali, several trade officials traveled to Singapore to work on a regional trade pact involving 12 Pacific Rim countries, known as the Trans-Pacific Partnership, which includes the U.S. and Japan.

Such smaller trade pacts have proliferated in recent years as the Doha round of talks hit roadblocks. The U.S. and Europe are also in the early stages of discussing a regional trade pact, and various nations are working on other bilateral and regional pacts.

“The action is in the regionals,” said Kati Suominen, a trade expert at the University of California, Los Angeles. “For business, multilateralism has simply proven to be too slow and of limited value to keep investing in.”

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Companies Feel China’s Slower Growth

By Carlos Tejada and Paul Mozur
July 16, 2012 10:42 a.m. ET

BEIJING—China’s slowing economy is beginning to hit the corporate bottom line at a number of foreign and domestic companies, as warnings of lower profitability set the stage for discouraging results in coming weeks.

Since late Friday, major Chinese companies including electronic equipment maker ZTE Corp. 000063.SZ -2.07% , China Eastern Airlines Corp. 600115.SH -1.41% , retailer Suning Appliance Co. 002024.SZ -4.63% and electronics maker TCL Communication Technology Holdings Ltd. 2618.HK -0.81% warned that results would be lower than expected. The reports helped send Shanghai’s benchmark stock index down 1.7% on Monday despite a generally positive day in Asian markets.

The reports followed similar ones in recent days from sportswear maker Li Ning Co. 2331.HK -3.53% and Dongfeng Automobile Co. 600006.SH -1.01% A number of foreign companies, including engine maker Cummins Inc. CMI +0.51% and shoemaker Nike Inc. NKE -0.69% of the U.S. as well as Burberry Group BRBY.LN -0.13% PLC of the U.K., have also indicated softening growth in demand in China.

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Quenching your thirst on road to democracy: Coke, Pepsi wage war in long-isolated Myanmar

131003-myanmar-coke-main-243p_photoblog600By Fiona MacGregor, NBC News contributor

YANGON, Myanmar — Consumers in long-isolated Myanmar are getting their first taste of globalization — and finding it is sweet, fizzy and comes served in a can.

An end to international sanctions after decades of military rule has brought Coca-Cola and Pepsi back to the country, which is also known as Burma, triggering a soft-drink stand-off featuring the giants as well as several local brands.

Although it’s been just five months since Coca-Cola started production in Myanmar after a 60-year absence, the brand has already painted much of Yangon red and white.

Until recently, Myanmar, North Korea and Cuba were the only countries where Coke didn’t have an official presence. Wealthy people in the capital could find illicitly imported Coke in upmarket hotels and restaurants, but generations of ordinary folk had grown up without ever tasting its still-secret recipe.


Trade Talks Run Long

Footwear Makers’ Rift Over Tariffs Reflects Lingering Issues

By Ben Otto, Anh Thu Nguyen

NUSA DUA, Indonesia—A showdown between the footwear makers Nike and New Balance embodies the hard decisions facing the U.S. and 11 other countries this weekend as they try to nail down a sweeping new Asia-Pacific trade pact.

Negotiators meeting on the resort island of Bali, Indonesia, are confronting some of the last but most-sensitive issues in a proposed Trans-Pacific Partnership, which would one be one of the world’s largest free-trade agreements if completed.

Negotiators say that none of the remaining sticking points should stand in the way of the ambitious goal of concluding the talks this year. But as the long-stalled Doha round of global trade talks illustrates, nothing quite bogs down trade deals like disagreements that date back decades.

“The meeting in Bali begins the TPP endgame process in earnest,” said Matt Priest, president of Washington-based Footwear Distributors and Retailers of America.

At the heart of the sneaker dispute are U.S. tariffs on footwear that date back to the 1960s. Businesses in Vietnam, the world’s No. 2 shoemaker after China, say they average about 10% on the type of shoes Vietnam exports to the U.S., but can go much higher.

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Tide Reverses in Latin America

Brazil’s Prospects Fall While Mexico’s Rise as Fed Prepares to Ease Bond Buying


The divergent fortunes of global emerging markets can be told through Latin America’s two biggest economies: Mexico and Brazil.

Think of it as a tortoise-and-hare story. For the past decade, Brazil has boomed by selling raw materials to China. Its expanding middle class gorged on a tide of cheap credit unleashed by central banks in advanced economies as they tried to energize their recoveries.

NA-BX975_OUTLOO_D_20130908180915Brazil’s economy averaged 3.6% annual growth over the past decade, peaking at a 7.5% pace in 2010. Its currency surged in value.

All the usual signs of excess were in evidence: Brazilian shoppers cramming stores in New York and Miami; news stories reporting $30 cheese pizzas and $35 martinis in São Paulo.

By comparison, Mexico has seen lackluster growth, partly because it has been tied to a struggling U.S. economy. It has also suffered from deep problems of its own: laws that banned foreign investment in energy, a dysfunctional tax code, a tattered education system and hidebound economy dominated by a handful of near-monopolies. And it suffered a surge in drug violence, deterring tourists and investors.

Taking Aim at China’s Internet

BEIJING—In August, Internet entrepreneur Zhou Hongyi set out to capture a chunk of China’s $3.3 billion search market, an area so dominated by Baidu Inc. (BIDU +4.77%) that the company is often called the Google (GOOG +0.85%) of China.

Just three months later, Mr. Zhou’s New York-traded Qihoo 360 Technology Co. (QIHU +1.20%) has a roughly 10% share of searches, according to the company. Using its platform as an Internet portal and antivirus services provider, Qihoo 360 appears to be taking some share from Baidu, which has blocked some of its content from Qihoo’s search results.

MK-BZ102_QIHOO_D_20121129204310Mr. Zhou—a slight 43-year-old former Yahoo Inc. (YHOO -0.98%) executive with a passion for guns and classical music—has also publicly criticized Baidu, arguing that the company’s dominance of search has resulted in a weak product that has too many advertisements. Some of China’s biggest Internet companies “are in a monopoly position, so those players aren’t good at innovation,” he said in an interview.